Tracing shipping documents to prenumbered sales invoices provides evidence that: A. No duplicate shipments or billings occurred.
B. Shipments to customers were properly invoiced.
C. All goods ordered by customers were shipped.
D. All prenumbered sales invoices were accounted for.
Correct Answer: B
Explanation: Choice "b" is correct. Tracing from shipping documents (source documents) to sales invoices provides evidence that shipments to customers are properly invoiced. Choice "a" is incorrect. Tracing shipping documents to sales invoices wouldn't necessarily identify duplicate shipments or billings. Duplicate shipments or billings could be identified by accounting for prenumbered shipping documents and sales invoices. Choice "c" is incorrect. The auditor would compare the signed purchase order to shipping documents to determine if all goods ordered by the customer were shipped. Choice "d" is incorrect. To determine that all prenumbered sales invoices were accounted for, an auditor would review the consecutive numbering of invoices and then trace from the sales invoices into the sales journal.
Question 862:
Which of the following internal control procedures most likely would deter lapping of collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
C. Segregation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Correct Answer: C
Explanation: Choice "c" is correct. Lapping is a defalcation in which a cash shortage is concealed by applying later customer remittances to a receivable account from which money was stolen. Lapping can be deterred by appropriate segregation of duties between receiving cash and posting to the accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash to cover it up through inappropriate remittance credits. Choice "a" is incorrect. Even with a lapping scheme, the dates of cash receipts journal entries and the dates of daily cash summaries would still agree, since the stolen funds would be excluded from both places and subsequent receipts would be included in both places. Choice "b" is incorrect. The authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval would not deter lapping, since lapping schemes do not involve write-offs. Choice "d" is incorrect. Even with a lapping scheme, the daily cash summary would still agree with the sum of the cash receipts journal entries. Stolen funds would be excluded from both places and subsequent receipts would be included in both places.
Question 863:
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
A. Employee fidelity bonds.
B. Independently prepared mailroom prelists.
C. Daily check summaries.
D. A bank lockbox system.
Correct Answer: D
Explanation: Choice "d" is correct. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a bank lockbox system. With this system the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis. Most larger companies use a lockbox system. Choice "a" is incorrect. Employee fidelity bonds may cover some of the losses suffered by misappropriation, but they do nothing to prevent the embezzlement in the first place. Choices "b" and "c" are incorrect. Independently prepared mailroom prelists and daily check summaries are good controls over cash receipts, but they are not as effective at reducing the risk of employee misappropriation as a lockbox system. With a lockbox system, employees have no access to cash receipts and therefore no opportunity to misappropriate cash.
Question 864:
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
A. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
B. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.
C. Employees involved in the credit-granting function are separated from the sales function.
D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Correct Answer: C
Explanation: Choice "c" is correct. Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function. Choice "a" is incorrect. Employees responsible for authorizing sales and bad debt write-offs should be denied access to cash to prevent the embezzlement of cash, not to prevent them from maximizing sales volume at the expense of high bad debt write-offs. Choice "b" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs. Choice "d" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs.
Question 865:
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
A. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Correct Answer: D
Explanation: Choice "d" is correct. Selecting prenumbered shipping documents and matching them with entries in the sales journal is a control that would help ensure that all credit sales transactions are recorded. (Shipping documents without corresponding sales journal entries might indicate unrecorded sales). Choice "a" is incorrect. Sending copies of approved sales orders to the credit department for comparison to authorized credit limits and current account balances before the sale is made controls the risk of bad debts, not the proper recording of credit sales transactions. Choice "b" is incorrect. Reconciling the accounts receivable subsidiary ledger to the control account ensures that the accounts receivable balance in the general ledger is properly recorded, but would not necessarily identify unrecorded credit sales. (Unrecorded credit sales would be omitted from both places,
and therefore the subsidiary ledger and control account would still agree).
Choice "c" is incorrect. Controlling the mailing of monthly statements and investigating differences reported
by the customers is not an effective control over the proper recording of credit sales transactions, since it is
possible that customers would not complain if they were not billed.
Question 866:
Tracing bills of lading to sales invoices provides evidence that:
A. Shipments to customers were recorded as sales.
B. Recorded sales were shipped.
C. Invoiced sales were shipped.
D. Shipments to customers were invoiced.
Correct Answer: D
Explanation:
Choice "d" is correct. Tracing from a population of bills of lading (shipping documents) to sales invoices
provides evidence that shipments to customers were invoiced.
Choice "a" is incorrect. Tracing bills of lading to the sales invoice provides assurance that shipments to
customers were invoiced, not that they were recorded as sales.
Choice "b" is incorrect. Tracing from the sales journal to bills of lading provides evidence that recorded
sales were shipped.
Choice "c" is incorrect. Tracing from a population of sales invoices to the bills of lading provides evidence
that invoiced sales were shipped.
Question 867:
The information below was taken from the bank transfer schedule prepared during the audit of ABC Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks illustrate deposits/transfers in transit at December 31, 20X1?
A. #101 and #202.
B. #101 and #303.
C. #202 and #404.
D. #303 and #404.
Correct Answer: B
Explanation:
Choice "b" is correct. A deposit in transit is a disbursement recorded in one accounting period with the
receipt occurring in the subsequent period. Assuming all checks were dated and issued on December 30,
20X1, any deposits with a receipt date in 20X2 would indicate a deposit in transit at December 31, 20X1.
Checks #101 and #303 both meet this criterion and therefore illustrate deposits/transfers in transit at
December 31, 20X1.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
Question 868:
The information below was taken from the bank transfer schedule prepared during the audit of ABC Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks might indicate kiting?
A. #101 and #303.
B. #202 and #404.
C. #101 and #404.
D. #202 and #303.
Correct Answer: B
Explanation:
Choice "b" is correct. Kiting is concealing a cash shortage by depositing in one bank an unrecorded check
of another disbursement bank, so that the deposit is recorded in both banks. An auditor would most likely
detect kiting by reviewing the bank transfer schedule and following-up on all transfers for which the receipt
date per bank is recorded in the accounting period before the disbursement date.
Checks #202 and #404 both meet this criterion and therefore might indicate kiting.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
Question 869:
Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?
A. Shipments lacking sales invoices and shipping documents.
B. Excessive write-offs of accounts receivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.
Correct Answer: C
Explanation:
Choice "c" is correct. A sales cut-off test is used to detect unrecorded sales (shipments where no invoice
has been generated) or sales allocated to the wrong period (January sales included in December by
"holding the books open").
Choice "a" is incorrect. A sales cut-off test relies on shipping documents to test the "cut-off" of sales invoices. Shipping documents are selected and the corresponding sale is examined to determine whether it was recorded in the proper period. A cut-off test is unlikely to detect the omission of shipping documents, since transactions without such documentation would have no chance of being selected for testing. Choices "b" and "d" are incorrect. Sales cut-off testing generally does not involve tests related to accounts receivable.
Question 870:
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
A. The cash receipts journal was held open for a few days after the year-end.
B. The last checks recorded before the year-end were actually mailed by the year-end.
C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
Correct Answer: C
Explanation: Choice "c" is correct. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period (bank transfer test) to detect whether cash balances were overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, effectively recording the same funds in both bank accounts). Choice "a" is incorrect. If the cash receipts journal were held open for a few days after the year-end, cash receipts from the subsequent year would be erroneously included in the current year's accounting records. A bank transfer test is not typically used to detect this situation. Choice "b" is incorrect. If the last checks recorded before the year-end were actually mailed by the yearend, appropriate cut-off has occurred. Bank transfer tests would not be required to evaluate this situation. Choice "d" is incorrect. A bank transfer test is not generally used to detect unusual payments to or receipts from related parties.
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